Shorting Penny Stocks – What You Need To Know Before You Try

Google the phrase “shorting penny stocks” and you get no end of blog posts offering to show you the way. Few, as far as we’ve found, go into the heart of the matter, explaining the not just the benefits of shorting penny stocks, but highlighting also the very real dangers. We believe you can’t effectively play the shorting penny stocks game unless you have a good grasp of the process. This article will outline that process and lay out the actual dangers so you don’t get burned shorting penny stocks.

Shorting Penny Stocks – What Is Shorting Anyway?

The first thing we ought to do is lay out clearly the shorting process. This applies to any type of stocks – big board, OTC, it doesn’t matter. The principles are expansive.

Short selling works like this. Unlike regular share transactions where you buy the shares for X price with the hope of selling later at Y price, you actually, in a short selling scenario, sell the shares first. Once stage one is executed, you then wait for the second phase of the short selling process where you exercise the commitment to buy the shares back at a lower price. But here’s the thing, shorting is high-level speculation because there’s no guarantee that when you come to buy the shares back they’ve met your pricing projections. Shorting penny stocks is always done on the prediction that the price of a security will fall. It’s essentially a bet that a stock will tumble. This bet can be based on anything: a rumor, poor financial projections for the company, war, even a national political event. The number of reasons traders short securities are pretty expansive, but the underlying premise is the same.

Shorting Penny Stocks – Danger Ahead

This is important though. When you buy shares normally with the hopes of selling at a higher price, you really can lose no more than the sum of your initial investment. When shorting penny stocks this is not the case; quite the opposite in fact. How much can you potentially lose? Here’s the unvarnished reality behind shorting penny stocks: your potential losses can be unlimited. This isn’t hard to see given that you’ve committed to buying the shares back at a future date. Should a stock increase in value instead of decreasing, you could lose thousands, perhaps even millions.

There’s also one important consideration which must be borne in mind when shorting penny stocks. A lot of brokers, as a matter of policy, don’t allow short selling on securities that fall below a certain threshold. You’d probably have to check with your broker but some we’ve seen set a limit of $5. Obviously the $5 threshold precludes penny stocks since the standard definition of a penny stock is any security that trades below $5. This is part of the reality which makes shorting penny stocks a bit of a challenge. Truly committed traders of course don’t stop at one broker who sets up an impediment to shorting penny stocks. The truly resourceful spend the time searching for both the right penny stock to short, and the broker that will allow the short to take place in the first place.

Of course savvy day traders don’t spend too much time chasing shorting penny stocks. They are always busy sourcing top penny stocks of all shapes and sizes, trading them and turning them into strong upside opportunities. It helps also to have a solid newsletter helping with the search for these penny stocks. This is why we always recommend signing up to a credible and reliable newsletter service for your top penny stock picks. Why not sign up with one today?